Since the election, interest rates have started going up. This will have a direct effect on the cost of housing. A one-half percent change in interest rates can affect your monthly payment more than a five percent change in home prices.
When does one-half equal more than five? When interest rates increase! Here’s what a change in interest rates costs you compared to a rise in home prices.
I’ve used a $500,000 purchase price with a 20 percent down payment. Interest rates are broken down in 0.25 percent increments from 0 to 1 percent. Price increases are broken down in 2.5 percent increments from 0 to 10 percent.
Effect on Buyers
What does this mean for buyers in San Diego County? It means that buying a home in an already difficult market will just get harder. The California Association of Realtors® Housing Affordability Index is already showing that only 26 percent of households can afford to buy the median priced home in San Diego County. Interest rate increases will only make this tougher, especially for first time buyers.
There still are options though. Condominiums and town homes tend to sell for significantly less than detached homes. Buying a smaller home or changing neighborhoods will bring you more choices. You could also increase your down payment or bring in a co-borrower. As interest rates increase, adjustable rate mortgages will make more sense, especially those that are fixed for five or seven years.
The plus to all of this is that it shows that the economy continues to improve, and the job market is strengthening. Hopefully underwriters will loosen up their standards and make borrowing a little easier. And even though interest rates are moving up, they are still quite a bit lower than they were for decades.
If you’ve been holding off on purchasing a home, it might be a good idea to take action. Another increase in rates might just put you out of the market. If you need some help getting started, check out my Buyer’s Tips.